For the past couple of weeks we have been a little cautious on the markets as price had seemed over stretched on the recent optimism, this bearish skew was strengthened with the Hindenburg Omen being triggered which highlighted how so much of this move was down to just a few names in the index, and not due to broad buying right across the market.
However as highlighted last week the power of these few names has again been too strong, so despite ongoing concerns that the strength is rather too concentrated to be ideal, there is still underlying buying interest.
We have drawn a new trend channel where price action has even been able to accelerate the already strong bullish trends, black lines on chart. Leading to some market commentators referring to “melt-up” conditions.
As stated in our last note the major concern for the days ahead is the serious risk that President Biden may yet drop out of the election race, and could even step down as President due to his now impossible to ignore serious mental decline. Previously the administration, and much of the US left leaning media, had played down this mental decline as they believed he was still able to win the election.
After the truly disastrous debate performance, and continued major gaffs, all hopes of a successful campaign have gone. So now the US media has started to turn on Biden as they can see another Trump presidency looming, not because they were not aware of this before, but because they now know they cannot lie enough to cover it up anymore.
This could well cause a significant shock to the markets and increase volatility as the probability of another Trump presidency gets priced in. So traders do need to be wary of possible volatility ahead.
This volatility could be a near term shock to the down-side due to the strong short term trends which may have over extended. However we would not turn more negative until/unless these new support areas are broken, currently down around 5450. Moves under here would still “only” drop the index back into the previous trading range, blue region on chart. So to turn outright negative we would need to see the market dropping under 5300, giving the index plenty of room to move in the coming days if near term volatility does emerge on political developments.